Shares of Sepracor ( SEPR) soared Tuesday after the company issued fourth-quarter financial results that bulldozed Wall Street's expectations and enabled the company to enjoy its first profitable year. The Marlborough, Mass., maker of the sleep drug Lunesta and the asthma medication Xopenex issued 2006 earnings and revenue guidance that exceeded the consensus prediction among analysts. By early afternoon, Sepracor's stock was up $7.12, or 14.7%, to $55.50 on trading that was eight times the average daily volume for the past three months. The stock rose as high as $55.89. Sepracor reported a fourth-quarter profit of $37.2 million, or 32 cents a share, on revenue of $311.1 million. Analysts polled by Thomson First Call expected a profit of 5 cents a share on revenue of $282.9 million. For the same period last year, Sepracor lost $33.7 million, or 33 cents a share, on revenue of $131.4 million. The fourth-quarter results sent the full year into the black. Sepracor earned $4.97 million, or 4 cents a share, on revenue of $820.9 million last year. The consensus estimate called for a full-year loss of 42 cents a share on revenue of $793.7 million. "This should silence the multitude of bears," says Corey Davis of J.P. Morgan, who reaffirmed his overweight rating on the stock. Lunesta produced fourth-quarter sales of $144.9 million, and Xopenex contributed $158 million, both of which exceeded Davis's expectations. "We think there's plenty of upside here, given the recent surges in both market growth and share gains," says Davis, who doesn't own shares and whose firm has provided non-investment-banking services in the past 12 months. The bearish case is that Sepracor can't sustain the necessary growth in Lunesta prescriptions and sales while it spends heavily to promote the drug against bigger, deeper-pocketed opponents. Competitors include Sanofi-Aventis ( SNY), which sells Ambien and Ambien CR, and Takeda Pharmaceuticals, the maker of Rozerem.
Another marketing heavyweight, Pfizer ( PFE), could enter the market this year with Indiplon, which was developed by its partner Neurocrine Biosciences ( NBIX). The Food and Drug Administration is expected to rule on the drug in May. In recent months, however, Sepracor has been gaining more fans on Wall Street. According to Thomson First Call, 11 analysts have buy recommendations, whereas four have either sell or hold ratings. Three months ago, there were eight buy ratings vs. four sell or hold ratings. One neutral analyst is Michael Tong of Wachovia Securities, who has a market-perform rating on the stock. He told clients Tuesday, just before Sepracor's shares erupted, that although the firm's pipeline "has inherent value, the current share price appears to have reflected fully the company's near-term prospects." He doesn't own shares of Sepracor. Sepracor's 2006 guidance did nothing to ease the bull-bear split on the stock. The company's estimate of $1.50 of earnings per share and revenue of $1.28 billion exceeded the Thomson First Call forecast of $1.26 a share and $1.2 billion. This year's guidance "was what the cynics were most concerned with, and that, too, came in well ahead of expectations," says Davis of J.P. Morgan. However, David Woodburn of Prudential Equity Group believes earnings expectations might be too high. He has an underweight rating on Sepracor even though he says it's "one of the best stories" in the specialty pharmaceutical group. Sepracor's administrative and marketing costs will be greater than expected in 2006, he says. Woodburn, who doesn't own shares, tells investors to "take advantage of the strength while it exists, instead of waiting for the Indiplon launch," which he forecasts for June.